New Statesmen - Richard Reeves and Dan Leighton - Published 25 April 2010

The Liberal Democrats understand, as the public does, that our politics is broken. Now, the nation’s elite centres of power – the City and Westminster – must be taken to the wrecker’s yard.

We are at a critical political moment. But what kind? Left-leaning politicians declare 2010 to be a "social democratic" moment, with a newly legitimate role for the state in economic life ­following the collapse of the financial markets. But centre-left parties are being pummelled at the polls across Europe, and Labour is still headed for defeat on 6 May. So maybe not.

Those on the right see instead a conservative moment, as people rail against the intrusions of a "nanny", "big brother" or "database" state, and aspire to greater morality and responsibility in national life. But David Cameron is having to work very hard to beat a tired Labour government that has doubled the deficit and taken us into the worst recession since the 1930s. If this were a "conservative moment", he would be romping to a huge win.

The surge in support for the Liberal Democrats following the first televised leaders' debate on 15 April may give the impression that we are in the midst of a liberal moment. Scratch the surface, though, and it is less their specific policies that resonate - scrapping Trident or earned citizenship for illegal immigrants - than their attacks on vested interests in Westminster and the City. It is not Nick Clegg's liberalism that attracts, but his "pox on both your houses" stance.

In fact, this is a republican moment. The philosophy of Cicero, Machiavelli and Wollstone-craft - based on the public interest, the freedoms of citizens and the distribution and restraint of power - provides the answers to today's problems. While the Conservatives attack the corrupting power of the big state, they remain silent on big business and big finance. And it was Vince Cable, rather than Gordon Brown, who articulated the most republican ­reaction to the protestations of business leaders against the National Insurance rise: "I just find it utterly nauseating all these chairmen and chief executives of FTSE companies, being paid a hundred times the pay of their average employees, lecturing us on how we should run the country. I find it barefaced cheek."

A British liberal republic would be founded on two immutable principles. First, nobody should be subject to the arbitrary power of ­another - whether in the workplace, parliament or a police cell. Nobody would live, in Rousseau's phrase, "at the mercy of another". This means taking the nation's elite centres of power - the City and Westminster - to the wrecker's yard.

Second, democracy should be recast as a process of negotiating a public interest, rather than simply mediating between competing private interests. Many goods can be produced only in concert with others, and many of these common goods are produced over a longer time-frame than the current rhythm of political and economic decision-making. Republicanism currently suffers from what Charles Saatchi might call a "branding problem". It is associated with blood on the streets, guillotines and barricades. For others, a republican is an American right-winger or someone who just wants to get rid of the Queen.

Yet, among academics, republican thought is resurgent, with public intellectuals such as David Marquand and Stuart White working with republican professors, including Cécile Laborde at University College London, Quentin Skinner at Queen Mary, University of London, and Melissa Lane at Princeton. Democratic republicanism shares with liberalism a concern for individual freedom - but one drawing from what Marquand calls "a tradition of 'neo-Roman' liberty, for which dependence on another's will was itself a denial of freedom". This gets to the key issue of the current moment - a pervading sense that ordinary people are subject to the decisions and consequences of the economic and political elites, with little or no control over them. Powerlessness is the great evil stalking the land today.

Given the failure of the major political parties - with the partial ex-ception of the Liberal Democrats – to seize this republican mo-ment, it is not surprising that even the dramatic events of the past two years have failed to lift voters out of their scepticism and apathy. Westminster politicians are trapped in outdated philosophies, like the anti-democracy Whigs and Tories of the mid-19th century whom Disraeli likened to the staff of rival coaching inns, "condoling together in the street over their common enemy, the railroad".

The insipid manifestos of both Labour and the Conservatives will be thrown on the fire of any self-respecting republican. While there are, in both documents, glimmers of inadvertent republicanism, they fall far short of the three republican demands for 2010: a politics based on the sovereignty of people; an economy founded on public interest; and a social world dominated by neither the "big state" nor "big society", but populated by big citizens.

The reforms mooted by the two main parties represent, at best, some well-meaning tinkering. They offer micro-measures of citizen control - local referenda on tax, bureaucratic procedures for recalling MPs and modest reforms to the electoral system - without addressing the distorted DNA of the British constitution: the doctrine of parliamentary sovereignty. None follows the implications of "giving power to the people" to the logical republican conclusion: a new constitutional settlement grounded in popular sovereignty that puts parliament in its place in relation to citizens.

A British republic requires a written constitution and a bill of rights, drafted to constrain arbitrary power relationships between different branches of the state, and between state and citizen. Republicans would embed institutional mechanisms to ensure citizens are the custodians, as well as owners, of the constitution. Richard Gordon, one of the country's leading thinkers on public law, proposes a "citizens' branch of the constitution", with members selected annually at random from the electoral register. The resulting citizens' council could initiate legislation, public inquiries and make applications directly to the Supreme Court on questions of constitutional interpretation. This third chamber would allow citizens to initiate political reform, rather than waiting for politicians in the Commons and Lords to concede democratic ground. The threat of the third chamber would provide a counterbalance to the pressures imposed by party whips on politicians in the other two houses.

Also on the republican list of demands: abolition of the Privy Council; full proportional representation in elections for the House of Commons; decentralisation of power to local and community authorities; a voting age of 16; fixed-term parliaments; state funding of political parties; a ban on outside earnings for MPs; more powerful Commons select committees, with powers to confirm or block ministerial appointments; elected police chiefs and elected mayors in all the major cities. Oh, and the abolition of the monarchy (although this is, in truth, the least of our worries).

But the republican concern with arbitrary power and public interest does not stop at the frontiers of the state. The economic crisis was a product of unequal power relationships as much as the flawed assumptions of neoliberal economics or the wishful thinking of financial innovation. The crisis has made it clear that what is good for the City is not necessarily good for the country.

The economic demands of republicans focus on balancing the power of different economic agents in the public interest and minimising the arbitrary power people are exposed to in the workplace. Regulation of economic life would be characterised by a much broader battery of public interest tests. One of the most striking decisions taken by New Labour in 1998 was to remove the "public interest" clause from legislation concerning corporate takeovers - a move it is now pledged to reverse. For a republican political economist, this would amount to a small first step.

At present, merger decisions are judged solely on issues of economic competitiveness, rather than longer-term, sustainable economic growth or the social consequences of the ravages of market competition. In a republican economy, as the philosopher Richard Dagger puts it, "The short-term interest in less expensive commodities is outweighed by one's long-term interest in being part of an economically ­stable community."

A republic would also guard against any section of the economy gaining arbitrary power over other sectors. The pre-2008 over-reliance on financial services and the emergence of banks that were "too big to fail" created a situation in which the rest of society began to serve their needs, rather than the other way round. Machiavelli warned 500 years ago that elites are liable to distort public laws and bodies for their own benefit. As Skinner puts it: "If we suffer from ambition, we tend to think that the best way of getting what we want will be to reshape the institutions of the community to our own ends."

Banks have to be resculpted as institutions of the community, broken up so that their size no longer enables them to exert arbitrary power over the rest of the economy and public policy, and split in half to ensure that unsuccessful capital speculation cannot cripple the "utility" supply of credit to the broader economy. A republican finance bill would create a raft of ­specialist banks to finance more plural and sustainable sources of economic growth. As Will Hutton (one of many public intellectuals who are republicans without realising it) demands: "We need infrastructure banks; housing banks; green banks; creative industries banks; knowledge economy banks - the list is long."

The drive to maximise shareholder value has created workplaces in which managers are given a near-sovereign command over their employees. Patterns of ownership within firms - as well as between them - also need to be reshaped. Firms obviously need to be profit-making, but the distribution of power matters as much as the distribution of profits.

Employee-owned businesses, giving workers much greater control over their working life, are ideal republican institutions. But at present, only one in 20 firms is employee-owned. A republican chancellor would aim to increase this by a factor of ten. Tax incentives, regional development agencies, enterprise capital funds, the Post Office and banks should all be deployed to change the norm of the business model. A dedicated public venture capital fund should be established to support mutuals and employee-owned businesses.

A republican politics and economy will rest upon a republican society. Laws, to be effective, require the consent of the populace. And just as politicians and financiers can exercise power over others, so social norms and behaviour can constrain or liberate citizens. As Isaiah Berlin pointed out: "To be deprived of my liberty at the hands of my family or friends or fellow citizens is to be deprived of it just as effectively."

A republican society would rely on what Skinner calls the "intangible hand" of morals, codes and norms: vigilance against the abuse of power, whether by officials or neighbours; a tolerance of, and respect for, the dissent and difference that a liberal republic would require; and a willingness to engage in collective and public endeavour. The idea of the public interest, which animates republican political economy, has to be one that the public has an interest in.

What republicans have called "civic virtue" can be translated as active citizenship - a willingness to shoulder a share of the work of maintaining and defending the institutions and fabric of society. Classes in citizenship education, introduced by Labour, are to be welcomed, though they often descend into a mix of dull political theory and exhortations to care a bit more by uninspired teachers.

The Conservatives have plans for a few days' worth of citizens' service at the age of 16; again, a move in the right direction, but a tiny one. In the long run, a more ambitious scheme of a full year of service - perhaps even compulsory - should be the goal. The faux argument between Labour and the Tories is between the "big state" and the "big society". Both can be oppressive: what is needed are big citizens - citizens with power, rights and pride.

A century and a half ago, the political writer Walter Bagehot suggested that, in Britain, "a republic had insinuated itself beneath the folds of a monarchy". This was a premature assessment, if the current offerings of the main political parties are any guide. The Liberal Democrats track some republican thinking closely in many areas of policy. A hung parliament may turn out to be a more republican one. But the debates dominating politics today - National Insurance rises and married tax breaks - miss the mark. The deep political problem facing us is not the distribution of money, or of morality, but of power. Power is the currency of republicanism, and the republican moment is upon us. The question is whether anyone will seize it.

Dan Leighton is head of the Public Interest Programme at Demos. Richard Reeves is the director of Demos and author of a biography of John Stuart Mill, "Victorian Firebrand", published by Atlantic Books